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Stock Analyst Update

Raising Facebook’s Fair Value

We’re boosting our view of Facebook’s growth and profitability after the firm reported excellent second-quarter results.


 Facebook (FB) reported second-quarter results well above expectations with significant top-line growth and a much wider margin expansion than we had anticipated. The firm’s continuing growth in monthly average users, or MAUs, displayed the stronger network effect moat source. We continue to view the firm as the dominant player within the social network space, and as one of the leaders in the digital ad market. Management did not make significant changes to its 2017 guidance and still expects a slowdown in ad revenue growth during the second half. We increased our fair value estimate for Facebook to $155 per share, from $140, as we now expect higher revenue growth and slightly less margin compression during the rest of 2017 and beyond. However, we would continue to wait for a wider margin of safety before investing in this wide-moat name.

Facebook’s second-quarter total revenue grew 45% year over year to $9.3 billion. Ad dollars keep coming to Facebook as the firm reported ad revenue of $9.2 billion during the quarter, up 47% over the prior year. Demand for the firm’s ad loads remained strong as Facebook is expected to reduce its inventory during the second half of 2017. Robust demand along with lower upcoming supply pushed Facebook’s overall average revenue per user, or ARPU, up 24% year over year. The firm ended the quarter with more than 2 billion MAUs, representing a 17% year-over-year user growth.

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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.